On December 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Bolivia, and considered and endorsed the staff appraisal without a meeting.[2]

Bolivia achieved impressive economic and social advances from 2006–2014. During that period, real GDP averaged about 5.1 percent annually and the share of population living in the extreme poverty fell by one half. These notable gains now face challenges related to the impact of lower commodity prices. Since the decline in natural gas and minerals prices in 2014, the government has implemented counter-cyclical macro policies and pursued their ambitious state-led development plan to support growth and further enhance social and economic development. While growth has remained robust, this approach has contributed to large fiscal and external current account deficits and foreign reserve losses.

Real GDP is expected to grow by 4 percent in 2017, relatively strong by regional standards. Accommodative fiscal policy, strong credit growth, and robust private consumption are expected to continue supporting activity while the fiscal and external current account deficits are likely to persist in the medium term. With weak private investment and the end of the commodity boom, growth is forecast to moderate gradually to 3.7 percent in the medium term. Key risks to this outlook include failure to discover new natural gas fields, further dollar strength, or lower-than-expected gas and minerals prices.

Notwithstanding impressive socio-economic advances from 2004–14, the current low commodity price outlook warrants a rebalancing of policies. A tightening in the macro policy stance and reallocation of social spending would help anchor stability, raise confidence, and preserve gains in social progress. Policy tightening should be supported with structural reforms to raise private investment and help the economy shift to new sources of growth in the non-extractive sectors―important reforms under any commodity price outlook. With still large buffers, Bolivia could take a gradual approach guided by a clear medium-term policy framework.

Fiscal policy should be tightened and made consistent with the macro-framework anchored by the nominal exchange rate. Under current policies, the outlook points to persistent fiscal and external deficits and continued reserve losses. Staff recommend a moderate reduction in the non-hydrocarbon deficit by about 1.2 percent of GDP per year aimed at stabilizing public debt and slowing reserve losses while still providing space to pursue social development objectives. Most of the fiscal tightening should come from the spending side. A gradual reduction in the wage bill-to-GDP ratio could be accompanied by streamlining public investment, focusing it on priority infrastructure, health and education, and taking steps to raise its efficiency. Consideration could be given to introducing a progressive personal income tax for high income earners and reforming the tax system for the hydrocarbon and mineral sectors to promote investment.

Key structural fiscal reforms would help the rebalancing process. A comprehensive MTFF would facilitate policy adjustment and should include a multi-year budget covering all public-sector entities, a target for the non-hydrocarbon primary balance, and independent and public assessments of risks. Second, Bolivia’s system of fiscal federalism should be grounded on principles of predictability, clarity of responsibilities between levels of government, scope for own-source revenues, and the use of objective criteria to determine transfers. Third, the legal framework governing SOEs should be strengthened and the operations of all subsidiaries included in the NFPS.

Central bank independence should be fortified. Staff recommend that, as inflation rises toward the BCB’s projection of 4.5 percent, the monetary policy impulse be withdrawn. In addition, the BCB’s exposure to SOEs should be unwound and direct central bank lending to enterprises shifted to the central government budget as transfers or net lending, or undertaken by the financial sector.

Most social spending in Bolivia is regressive and warrants review. There is a clear case for removing broad-based fuel price subsidies and offsetting the impact on the poorest with targeted support. Reforms should be well planned and accompanied by a detailed communications plan. More generally, social spending could be made more effective by focusing it on those most in need, including by introducing progressive fees for high-income earners.

The non-hydrocarbon traded sectors hold the key to sustained inclusive growth in Bolivia. Wage growth should be aligned with inflation, productivity growth and other objective criteria, and wage setting institutions and processes reformed. This will help to raise productivity and strengthen competitiveness. The current strategy of expanding state companies into commercial sectors and intervening in the product markets with restrictions and price controls should be reconsidered. Staff suggest finding other methods to ensure adequate domestic supplies of essentials and offsetting the impact on the poor with targeted programs. To promote hydrocarbon and mining exploration, the government could revise the investment and taxation regimes.

Some provisions of the FSL should be modified. Targets on productive sector lending should be removed and interest rate caps phased out to allow risk-return principles to underpin lending decisions. More market-oriented mechanisms to improve financial access should be considered and the housing loan portfolio monitored closely. ASFI should accelerate efforts to make financial sector supervision more risk-based and forward-looking, enhance its analytical capacity, and coordinate better with APS. Finally, the government is encouraged to approve and implement the AML/CFT national action plan.

Data provision is adequate but staff urge the government to move forward on priority reforms. Completion of the work to rebase GDP is of critical importance for the country, and timely publication of macroeconomic data based on a pre-announced schedule would improve transparency and efficiency. Following recent external sector TA, staff urge the authorities to compile external debt data according to BPM6 norms.

Bolivia: Selected Economic Indicators, 2014–19

I. Social and Demographic Indicators

GDP per capita (U.S. dollars, 2016)

3,105

Poverty headcount ratio

(percent of population, 2015)

38.6

Population (millions, 2016)

10.9

Gini index (2015)

45.8

Life expectancy at birth

(years, 2015)

69

Adult literacy rate

(percent, 2015)

92.5

Mortality rate, under-5

(per thousand, 2016)

36.9

Gross enrollment ratio, primary, both sexes (2015)

97.1

II. Economic Indicators

Baseline projections

2014

2015

2016

2017

2018

2019

Income and prices

(Annual percentage changes)

Real GDP

5.5

4.9

4.3

4.0

3.9

3.8

Real GDP excluding hydrocarbons

5.4

5.4

5.0

5.3

4.6

3.9

Nominal GDP

7.6

0.0

2.4

8.7

8.4

7.8

CPI inflation (period average)

5.8

4.1

3.6

3.1

4.5

4.5

Investment and savings 1/

(In percent of GDP, unless otherwise indicated)

Total investment

21.0

20.3

20.8

20.3

19.7

19.0

Of which: Public sector

12.4

13.5

13.0

12.4

12.0

11.5

Gross national savings

20.8

14.2

15.1

14.4

13.7

13.4

Combined public sector

Revenues and grants

39.9

37.7

33.2

31.6

31.6

31.8

Of which: Hydrocarbon related revenue

12.7

9.1

5.5

5.0

5.1

5.0

Expenditure

43.3

44.6

39.8

39.0

38.3

37.8

Current

28.2

29.1

25.0

25.3

25.2

25.2

Capital 2/

15.0

15.5

14.8

13.7

13.1

12.6

Net lending/borrowing (overall balance)

-3.4

-6.9

-6.6

-7.3

-6.7

-6.0

Of which: Non-hydrocarbon balance

-13.2

-14.0

-10.6

-10.6

-10.8

-10.1

Total gross NFPS debt 3/

37.0

40.6

46.2

49.8

51.6

52.8

External sector

Current account 1/

1.7

-5.7

-5.7

-5.8

-5.9

-5.5

Exports of goods and services

42.1

29.8

24.1

23.3

22.7

22.3

Of which: Natural gas

18.1

11.3

6.0

6.2

5.6

5.1

Imports of goods and services

38.9

35.6

31.5

29.4

28.8

28.3

Capital account

0.0

0.0

0.0

0.0

0.0

0.0

Financial account

2.3

-8.6

-6.9

-5.8

-5.9

-5.5

Net errors and omissions

0.6

-2.9

-1.3

0.0

0.0

0.0

Terms of trade index (percent change)

2.1

-23.1

-15.4

6.9

-0.5

-2.8

Net Central Bank foreign reserves 4/ 5/

In millions of U.S. dollars

15,123

13,056

10,081

9,875

8,780

7,518

In months of imports of goods and services

14.1

13.2

11.3

10.9

9.1

7.4

Money and credit

(Annual percentage changes, unless otherwise indicated)

Credit to the private sector

15.0

17.6

14.8

12.2

11.2

10.6

Credit to the private sector

(percent of GDP)

43.7

51.4

57.6

59.5

61.0

62.6

Broad money

15.6

16.2

2.6

7.1

8.7

8.3

Broad money (percent of GDP)

70.3

81.7

81.8

80.6

80.8

81.2

Memorandum items:

Nominal GDP (in billions of U.S. dollars)

33.2

33.2

34.1

37.0

40.1

43.3

Exchange rates 6/

Bolivianos/U.S. dollar

(end-of-period)

6.9

6.9

6.9

…

…

…

REER, period average

(percent change)

7.9

0.1

1.4

…

…

…

Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, World Bank, and IMF staff calculations.

1/ The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

2/ Includes nationalization costs and net lending.

3/ Public debt includes SOE's borrowing from the BCB but not from other domestic institutions.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, staff prepare a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.